US Natural Gas Liquids (NGLs) Supremacy Disrupts Global Markets / Equities Views

Transcription

1 Citi Research Multi-Asset 15 July pages North America US Natural Gas Liquids (NGLs) Supremacy Disrupts Global Markets / The Worst is Priced in; Visibility on Recovery Commodities views: The market has taken for granted US NGLs critical role in the energy industry, but the price collapse threw conventional wisdom out the window. For producers, the liquids uplift to production economics has turned into a liquids drag. Vast expansion plans of midstream firms and MLPs, and the profitability of US and global petchem in the world of Shale Supremacy are at stake. After prices plunged on low oil prices and oversupply, US NGLs prices should evolve in three phases: Depression in 2015, likely Resurgence in 2016 and Stabilization afterwards to Benchmark Mont Belvieu TX ethane prices could stay below 20c/gal; propane prices could be volatile; butane and isobutene prices could eventually settle above ~80c/gal; and pentane-plus prices should rise from ~110c/gal to ~130c/gal or more beyond Overproduction and export delays have left US NGLs, especially propane, stranded, but it is premature to call for permanently low prices. The size of the LPG tanker order book is ~40% of the current fleet, which should facilitate exports. Beyond 2016, US oversupply should ease. If our thesis on export debottlenecking and natural gas production slowdown plays out, there is sizable upside to NGL prices vs. forwards. However, US NGL/condensate exports should add to global oversupply and lead to inter-fuel competition between LPG and naphtha. The export arbitrage could be volatile, with impacts on shipping, oil/ngl/gas production, pipe infrastructure plans and global petchem outlook. Equities View Upstream: In 2015/16 Range Resources remains best positioned to weather lower domestic NGL prices. However, Q2/Q3 prices could be weak along with its other Northeast peers Antero, Chesapeake, Eclipse, and Southwestern. Equities View Midstream: Based on our updated forecasts for NGL prices by Citi s Commodities Team and the steep deterioration in the unit prices of many midstream MLPs exposed to NGL prices, we think the worst is priced in. In a separate note, we upgraded Targa Resources (NGLS) and Sunoco Logistics (SXL). We believe Enterprise Products (EPD), Targa (TRGP and NGLS) and SXL offer solid exposure to our theme of an NGL price recovery in 2016 supported by growing exports. Equities View Downstream: The ethylene chain has been resilient despite lower crude oil prices, reflecting a degree of market tightness. Even if propane and butane prices stage a recovery, DOW and LYB will still benefit from lower ethane prices. DOW continues to be our favorite commodity chemicals stock because of lower ethane prices and a variety of self-help initiatives it is pursuing. Commodities Anthony Yuen anthony.yuen@citi.com Edward L Morse ed.morse@citi.com Richard Morse richard.morse@citi.com Equities Faisel Khan, CFA faisel.khan@citi.com Robert S Morris robert.s.morris@citi.com P.J. Juvekar pj.juvekar@citi.com Oscar Yee oscar.yee@citi.com Vikram Bagri vikram.bagri@citi.com Eric C. Genco, CFA eric.genco@citi.com Joshua Grasso joshua.grasso@citi.com Nick S Raza nick.s.raza@citi.com See Appendix A-1 for Analyst Certification, Important Disclosures and non-us research analyst disclosures. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region and Qualified Foreign Institutional Investors.

2 Commodities View New industry paradigm from new NGL pricing The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails." William Arthur Ward Anthony Yuen Edward L Morse Richard Morse Natural Gas Liquids (NGLs or liquids ) are critical to a significant part of the energy value-chain and are poised to make waves in the global market as oil production gets lighter (higher shares of NGLs and condensate) and US NGL exports surge, driving up the NGL share in the global oil market. Citi has published extensively on NGLs and their sector impacts: Upstream - profitability of North American producers: Liquid Risk: how NGL prices could impact producer returns (Apr 15), Shale Oil and Gas Profitability Rebound (Apr 15), E&Ps Slash Spending (Apr 15), Exploration and Production MLPs: Maintaining Our Distance from the Wellhead (Mar 15) Midstream - vast expansion plans at stake: Pipelines & MLPs (Jan 15) Downstream - competitiveness of US and global petchem in the world of Shale Supremacy: 2015 Chemicals and Ags Stock Outlook (Jan 15), Asian Chemicals: 2015 Outlook (Jan 15), The US Light Oil-NGL Era Goes Global (Nov 14), NGL Era (Mar 14) and Ringing the Register: Cash Deployment from US Shale Supremacy (May 13) The new NGL Era: Despite the recent slowdown in shale drilling, both NGL and condensate production are expected to continue rising in the US. Production of NGLs and condensate has been surging in recent years, as the shale revolution has driven US oil production up 4.2-mb/d in the last 5 years and gas production up 14- Bcf/d. Even with lower oil prices prompting a slowdown in oil and gas production, NGL supply is expected to well exceed domestic demand in the coming years. While expanded export capacity may offer some relief, global market dynamics look soft and our long-term outlook remains neutral to bearish going forward. However, low oil prices, domestic oversupply and export constraints have driven NGL prices lower. NGLs are traditionally priced in relation to oil. Hence lower oil has negatively impacted NGL prices. Additionally, abundant US supply has faced infrastructure constraints in reaching global markets, trapping US production to create a glut with few relief valves. Lack of specialized LPG ships has also been an issue, as utilization of the existing fleet has reached levels near 99%! Alleviating infrastructure constrains is central to exporting the NGL glut now trapped in the US and providing uplift to NGL prices. Infrastructure constraints should start to ease by 2016/2017, allowing potential upside to prices as US production reaches global markets and petchem buyers. These infrastructure factors will be important to watch; if investments are lumpy, this could create price volatility in the near term. 2

3 Figure 1. World liquids supply outlook by type: NGLs to gain sizeable share in the year to come Figure 2. NGL prices at Mont Belvieu, TX, keep falling and diverge vs. oil in 2015 Figure 3. The NGL price ratio to WTI fell from the 40% range to at times below 30% % 90 Cents/gallon Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 NGL basket (Mont Belvieu TX) Apr-15 May-15 Jun-15 Brent Oil Brent ($/bbl) NGL basket price vs. Brent oil 40% 35% 30% 25% Dec-14 Dec-14 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 % Brent-MB CO-ICE Jun Brent price ($/bbl) Source: ExxonMobil Source: Platts, Citi Research Source: Platts, Citi Research Citi initiates US NGL price forecasts. Going forward, NGL pricing is likely to evolve in three phases: 2015 Depression: In addition to lower oil prices putting downward pressure on NGL prices, strong NGL production growth momentum and a shortage of LPG 1 ships hindering exports contribute to an oversupplied environment, even with export facilities ready to operate. See Citi s report US Gas/LPG: Exit Strategy Needed (June 2015) Resurgence: Fundamentals should tighten and prices should recover on (a) a necessary slowdown in gas production due to concerns on storage capacity, (b) a possible further slowdown in NGL production growth because of low prices in 2015, and (c) a surge of LPG ships to match export capacity and facilitate exports Stabilization: Continued production growth amid a lack of robust domestic demand growth could add to oversupply again. Rising global inter-fuel competition may reduce the appeal of additional US-sourced NGLs in the global market. Combined, they should weaken NGL prices again, but likely not to the extent of the 2015 fall, as the export supply-chain should have worked out its kinks. Figure 4. Citi NGL Price Forecasts to 2020 Mont Belvieu, TX ($/gallon) Brent ($/bbl) NG ($/MMBtu) Ethane Propane I-Butane N-Butane Natural Gasoline NGL Basket 3Q'14 $103 $3.94 $0.24 $1.04 $1.28 $1.22 $2.12 $0.87 4Q'14 $77 $3.75 $0.21 $0.76 $0.98 $0.95 $1.52 $0.65 1Q'15 $55 $2.87 $0.19 $0.53 $0.68 $0.64 $1.11 $0.48 2Q'15 $64 $2.73 $0.18 $0.51 $0.64 $0.59 $1.28 $0.49 3Q'15 $58 $2.60 $0.18 $0.35 $0.53 $0.50 $1.19 $0.41 4Q'15 $57 $2.70 $0.18 $0.43 $0.58 $0.54 $1.17 $ $58 $2.70 $0.18 $0.46 $0.60 $0.56 $1.19 $ $63 $3.00 $0.17 $0.65 $0.75 $0.71 $1.28 $ $75 $3.50 $0.19 $0.74 $0.88 $0.84 $1.44 $ $75 $3.50 $0.19 $0.72 $0.86 $0.82 $1.40 $ $75 $3.50 $0.19 $0.70 $0.83 $0.80 $1.36 $ $75 $3.50 $0.19 $0.70 $0.83 $0.80 $1.36 $0.59 Source: Platts, OPIS, Citi Research 1 LPG is short for Liquefied Petroleum Gas, which generally consists of propane and butane. 3

4 Figure 5. Citi NGL Price ratios to Brent to 2020 Mont Belvieu, TX Brent NG Ethane Propane I-Butane N-Butane Natural Gasoline NGL Basket 3Q'14 $103 $ % 42% 52% 50% 86% 35% 4Q'14 $77 $ % 42% 53% 52% 83% 36% 1Q'15 $55 $ % 40% 52% 49% 84% 36% 2Q'15 $64 $ % 34% 42% 39% 85% 32% 3Q'15 $58 $ % 26% 38% 36% 86% 30% 4Q'15 $57 $ % 32% 43% 40% 86% 32% 2015 $58 $ % 33% 43% 40% 86% 33% 2016 $63 $ % 43% 50% 47% 85% 36% 2017 $75 $ % 41% 49% 47% 81% 34% 2018 $75 $ % 40% 48% 46% 78% 34% 2019 $75 $ % 39% 47% 45% 76% 33% 2020 $75 $ % 39% 47% 45% 76% 33% Source: Platts, OPIS, Citi Research Figure 6. Citi Mont Belvieu NGL Price Forecasts vs. Forward Curve ($/gallon) 30 Ethane 80 Propane 100 Normal Butane 200 Natural Gasoline Cents/gallon Cents/gallon Cents/gallon Cents/gallon Forward Citi Forward Citi Forward Citi Forward Citi Source: Bloomberg, Citi Research The export bottleneck currently in place has dragged down liquids pricing and, by sympathy, the back of the NGL forwards (propane, butane and natural gasoline). Differences in oil prices could explain anywhere between 40 to 60% of the price difference between Citi s forecasts and forwards: Citi expects Brent to average $75/bbl in 2017, with the current futures at ~$66/bbl. However, note that forwards of NGL prices are generally not as liquid as oil or gas. In addition, producers tend to produce stronger hedging pressure on the forward curve given their size and desire to hedge forward for longer, compared with generally shorter hedging horizon of consumers. If our thesis on export debottlenecking and natural gas production slowdown plays out, then there is upside to various NGL prices. Three key drivers should keep prices volatile: (1) lower but fluctuating oil prices, (2) a domestic market in various stages of oversupply and (3) the changing export environment in the global competitive market. (1) Lower oil prices NGL prices, which are generally tied to oil prices due to direct competition between heavier NGLs and light oil, should stay structurally compressed in a lower oil price environment. With Citi expecting crude to settle in a significantly lower range than 2011-Q2 14 (WTI around $70, Brent around $75) out to 2018, NGL pricing should be under pressure. However, a modest price recovery in crude prices from current levels to our long-term range could lift NGL prices somewhat between 2015 and 2018, especially with export terminals opening up. 4

5 Figure 7. US Mont Belvieu (MB) NGL basket price ratios to WTI and Brent oil have fallen as US NGL supply has increased ( ). This oversupply should continue, keeping the ratio low. Hence, with structurally lower oil prices, NGL prices should stay lower than the past. 90% 80% 70% 60% 50% 40% 30% 20% Source: Platts, OPIS, Citi Research Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 % WTI-MB % Brent-MB Nonetheless, the oil market is also undergoing its own adjustment, with oversupply, high inventories, uncertain demand response and geopolitics as push-and-pull factors all working to influence price directions. That said, while lower oil prices could lower NGL prices further, a rebound in oil prices may not give NGL prices a comparable lift due to NGL oversupply. (2) Various degrees of oversupply in the domestic market Citi is forecasting lower US NGL production growth out to 2020 we revise NGL production in 2020 to 5.2-mb/d versus 6.1-mb/d as presented in Citi GPS Out of America (Nov 14) in response to lower levels of oil and gas drilling, less favorable NGL vs dry gas pricing dynamics, and lower gas production required in the years ahead. With the dramatic fall in oil prices and the likelihood that prices could stay 30% below previous averages of around $100/bbl, the NGL premium to natural gas has eroded, shifting incentives for production towards dry gas and away from NGLs. Overall, the impact is lower expected NGL production. Figure 8. Citi NGL supply/demand balance to 2020 NGL Production Ethane Propane Butane+Isobutane Pentane Net demand Production - Demand Source: EIA, Citi Research In the past, NGL production was boosted by strong natural gas production and the expectation that higher NGL prices could give production economics a lift. Around 80% of US NGL production comes from natural gas fields, with the remainder coming from crude oil wells. Hence, high oil prices steered producers to more liquids-rich plays. Coupled with strong gas production, NGL production grew strongly in 2014 and But as seen in the natural gas supply-demand table below, gas production growth should slow in 2016, as expected natural gas inventory could reach unrealistically high levels beyond storage capacity if the current rate of growth were to continue. 5

6 Along with lower oil prices reducing NGL prices and NGL s own oversupply depressing their value, NGL production growth should slow sharply in Figure 9. Citi natural gas supply/demand balances (bcf/d): gas production growth has to slow as demand growth moderates starting in 2016 US vs Total Supply Production* LNG Imports (0.2) Exports to Mexico (1.6) (1.9) (2.0) (2.8) (3.7) (4.6) (5.1) (5.5) (6.1) (3.3) Imports from Canada (1.1) LNG Exports (0.1) (1.1) (2.7) (5.0) (7.2) (8.1) (8.0) Demand Industrials ResComm (0.1) Electricity Generation (2.6) Pipe Use Lease and Plant Fuel Transport Growth Production* Source: EIA, Citi Research Thereafter, NGL production could stabilize: (a) oil could find a more sustainable price equilibrium after the market figures out the elasticity of US and global production; (b) gas production may be on a steadier growth course, though the oversupplied global liquefied natural gas (LNG) market could in turn reduce the need for US gas production growth; and (c) the global export market adjusts to the surge of US condensate and LPG exports. A slowdown in oil production growth could also curb the growth of natural gas liquids production. Figure 10. US oil production under strong rig recovery scenario (+100 rigs from May 15 to Dec 15, +300 rigs from May 15 to Dec 16) Figure 11. US oil production under partial rig recovery scenario (+100 rigs from May 15 to Dec 15, flat thereafter) mb/d (0.20) (0.40) Total US Alaska Fed Offshore L48 ex- GOM Big L48 ex- GOM, Big 7 mb/d (0.20) (0.40) Total US Alaska Fed Offshore L48 ex- GOM Big L48 ex- GOM, Big 7 Source: EIA, Citi Research Source: EIA, Citi Research However, whether there is a slowdown or reacceleration of NGL production growth, domestic demand should still fall far short of domestic production by a significant margin. Domestic demand is expected to be flat to only slightly higher for most NGLs through 2020, with the exception of ethane where demand may rise by two-thirds vs by Demand for propane and butane should remain relatively flat going forward as new petchem facilities mostly use ethane, while heating use should not see a break-out. Likewise, propane use in transportation, 6

7 estimated by EIA to constitute ~50MMBtu or approximately 36 kb/d of propane demand, should see limited growth particularly with crude and products pricing structurally lower. In all, with NGL production growth expected to average 0.2-mb/d between now and 2020, domestic supply is expected to exceed domestic demand by 1.6-mb/d by Figure 12. US NGL production expected to exceed domestic demand by 1.6-mb/d by 2020 mb/d Pentane+ Propane 2012 Source: EIA, Citi Research Butane+Isobutane Ethane Figure 13. Oversupply in domestic NGL market is driven particularly by oversupply in the LPG market; exports are key to relieving the glut mb/d Ethane Propane Butane Isobutane Pentane Plus (0.20) Source: EIA, Citi Research The regional NGL supply-demand imbalance will likely worsen. Key shale plays have led the field production growth of NGLs, with the major gas plays, Marcellus and Utica, located in the Northeast. But without much demand growth to absorb rapidly rising production there and a relative lack of new outbound NGL pipelines, wide regional price spreads should persist. The challenging pricing environment in the Northeast looks likely to remain, mostly because of transport cost netback. Ethane transport costs in the 15c to 20c/gal range, and rail costs in the 20 to 25c/gal range for higher-value NGLs present substantial drags in netback NGL pricing. Although some producers explore the export market in the Northeast, the global market, as discussed below, may also be edging towards oversupply, reducing the appeal and export netback to Appalachian production. For example, propane prices in Europe used to trade at around 90% of naphtha prices but had fallen to as low as the 60% level earlier in 2015 before rebounding to near 70%. 7

8 Figure 14. Ethane supply-demand forecasts (not including rejected ethane of around 0.3-mb/d) demand appears to almost match supply, but ethane rejection should widen the true gap Figure 15. Propane supply-demand forecasts modest demand growth, with new PDHs, can t keep the pace with the supply boom mb/d PADD 5 PADD 4 PADD 3 PADD 2 PADD 1 Demand mb/d PADD 5 PADD 4 PADD 3 PADD 2 PADD 1 Demand Source: EIA, Citi Research Figure 16. Butane + Isobutane supply-demand forecasts flat demand growth expected while supply growth should take-off Source: EIA, Citi Research Figure 17. Pentane+ supply-demand forecasts flat to slightly negative demand growth expected while supply growth should take-off mb/d PADD 5 PADD 4 PADD 3 PADD 2 PADD 1 Demand mb/d PADD 5 PADD 4 PADD 3 PADD 2 PADD 1 Demand Source: EIA, Citi Research Source: EIA, Citi Research Although the US domestic production-demand balance may look slightly tighter than some had expected, the US is still importing around 100-kb/d of propane on an annual basis, almost all from Canada. A lack of seaborne export outlets for Canadian NGLs makes the US the natural destination for Canadian NGLs. Heating demand for propane also raises imports of Canadian propane. 8

9 What are condensates and NGLs? There are no clear, unduly accepted definitions for condensates. In the US, field or lease condensate generally refers to very light oil, generally with API gravity at or above 50, that comes from oil-producing wells; can be exported only if processed in a plant, or via stabilizer and distillation unit afterward. NGLs, or natural gas liquids, which have a similar composition to field condensate but even lighter, are produced from natural gas wells, where the wet component is processed and fractionated to the constituent components (ordered from light to heavy): ethane, propane, butane and pentanes plus. Pentane plus is often called plant condensate because of its similarity to field condensate from oil wells. The word plant refers to how pentanes plus from gas wells has been processed at gas processing plants. Pentane-plus (or plant condensate) can be exported freely. NGLs could also come from refining. Refining crude oil typically yields several products: Liquid Petroleum Gases (LPG), Naphtha, Kerosene, Diesel, Vacuum Gas Oil and Vacuum Residue. LPG refers to the propane and butane mix. Naphtha is usually further processed to make gasoline through the isomerization or catalytic reforming process. Figure 18. NGL supply growth could far outpace domestic demand Figure 19. NGL Composition A Snapshot mb/d 6.0 Pentane+ Butane+Isobutane Propane Ethane Net demand NGL/Composition Vaporization/ Boiling Point Use Ethane -126F/-88C Petrochemical, Calorific Notes 5.0 Propane -44F/-42C Petrochemicals/Residential/Co mmercial/transport Part of LPG Butane 32F/0C Petrochemical/Residential/Co mmercial/transport/gasoline Components (Alkylate/Blending) Part of LPG Iso-butane 11F/-12C Basis for component alkylate in gasoline; Propellant & refrigerant AKA methylpropane; isomer of butanel; different arrangement of hydrogen molecules; lighter than butane Condensate/mainly C5-C10 molecules or pentane-plus Wide range Petrochemical feedstock; Full Many names; paraffinic or range of oil products; Solvent & naphthenic; remains liquid ethanol production, diluent, without special gas turbine power generation containment Source: EIA, Citi Research Source: Baker Institute, Citi Research (3) Changing export environment (a) Export capacity expansions may relieve some of the glut The landscape of NGL exports is set to change dramatically in the next several years. NGLs can be exported either by pipeline to neighboring countries or via waterborne transport. In April 2014, only limited terminal capacity for waterborne LPG exports of ~0.4-mb/d was online. However, by April of this year, ~0.8-mb/d of LPG export capacity was available. By the end of 2018, this number could rise to mb/d if all proposed projects proceed. Even if only sanctioned projects are completed, LPG export capacity would rise to 1.6-mb/d by 4Q 16. Heavier NGLs, such as propane and butane (or LPG), are easier and cheaper to transport and store due to their higher boiling point, while lighter ethane requires costly refrigeration. Due to these favorable transport/storage economics, most export capacity expansions only accommodate LPG; propane and butane/isobutane should see the majority of export growth over the coming years. However, some ethane export capacity is also expected to come online. 9

10 Figure 20. Propane and butane exports have risen in line with export capacity expansions Figure 21. LPG export capacity scheduled to come online in the next several years could potentially increase US exports of LPG to 1.8-mb/d Export capacity Propane Export Butane Export 1/1/2013 2/1/2013 3/1/2013 4/1/2013 5/1/2013 6/1/2013 7/1/2013 8/1/2013 9/1/ /1/ /1/ /1/2013 1/1/2014 2/1/2014 3/1/2014 4/1/2014 5/1/2014 6/1/2014 7/1/2014 8/1/2014 9/1/ /1/ /1/ /1/2014 1/1/2015 2/1/2015 3/1/2015 4/1/2015 mb/d Current Sanctioned Proposed Source: Company reports, EIA, Citi Research Source: Company reports, Citi Research Much of this expected export capacity expansion, along with pipeline expansion within the US especially in the US Northeast, will help to ease the Northeast regional glut by transporting NGLs from the Marcellus and Utica plays to export facilities in the Northeast and Gulf Coast. In particular, Sunoco s Mariner East pipeline, which transports NGLs from the Marcellus shale to the Marcus Hook export facility in Pennsylvania, should have a total of ~70-kb/d of capacity online by the end of this year (Phase I), and expand a further 275-kb/d in 2016 (Phase II) to bring total export capacity to 345-kb/d. This export capacity could be critical in easing the regional glut of propane and butane, but will also be able to absorb some excess ethane production, as roughly kb/d of capacity is expected to accommodate ethane exports. Figure 22. US LPG export capacity U.S. Propane Export Capacity Existing Facilities & mbbl/month m Bbls/Day Sanctioned Projects Low HIgh Low HIgh Timing EPD Current NGLS Current Mariner East 1 (SXL) Current DCP Midstream Current EPD Current Mariner South (SXL) Current Altagas/Idemitsu (Acquir Current Total of Current Occidental Late 2015 EPD Q:15 Phillips Q16 Mariner East Phase 1 (SX Mid Mariner East Phase 2 (SX Q16 Total Current + Sanction Proposed Projects Pembina Pipeline Corp Early 2018 Sage Midstream Q:16 Kinder Morgan Early 2017 Total Proposed Total Potential Source: Company reports, Citi Research 10

11 Besides waterborne exports, pipeline exports to Canada and Mexico may help ease the NGL glut. Exports of ethane to Canada have already started up via Mariner West (50-kb/d, PA to ON, 4Q13) while Kinder s Utopia (50-kb/d, OH to MI/ON) pipeline for ethane transport is expected to come online in Hence, up to 100-kb/d of ethane could be exported to Canada. Moreover, though no pipelines are yet online, the potential exists for NGLs to be exported to Mexico via pipelines for industries in the Northern border of Mexico From a pricing standpoint, exports should help to ease the US NGL production glut and provide price support for NGLs in coming years. Butane and isobutane prices particularly look to benefit from additional export capacity expansions. Like propane, the physical characteristics of butane make it easy to export. In addition, butane prices would benefit from the small size of the domestic market, increasing the potential impact of exports on domestic prices. (b) Short-term shipping constraints limiting exports Despite the potential for exports to ease the US production glut, in the shortterm we are unlikely to see this price support due to further constraints on NGL exports in the LPG shipping markets. LPG shipping markets, already tight at utilization rates in the high 90 s, will play a key role in the ability of US exports to expand. Currently the global seaborne trade in LPGs is around 75 million tonnes/yr, or 2.4-mb/d. Incremental US exports of 0.9-mb/d by 2020 would represent a meaningful boost, and require shipping fleet expansion. The figure below shows the development of seaborne trade. Figure 23. Seaborne LPG trade has grown seen sharp gains in recent years, supported by growing US exports which should continue to grow mtpa Source: Clarksons, Citi Research LPG fleet utilization had been tightening since 2009, rising from around 65% to 99% by the end of Rising export volumes from the US and Middle East have been key drivers. US export volumes increased around 70% in 2015 and Mid East volumes by about 10%. Increased US exports are also increasing shipping distances by around 4-5% in 2014 and At present, the breakdown of US LPG exports by destination is approximately 29% Asia, 30% South and Central America, and 17% to Europe, with the rest to other destinations. 11

12 Figure 24. LPG vessel fleet growing in recent years (cubic meters) Figure 25. LPG vessel fleet growing in recent years (number of vessels) 21,000,000 1,550 20,500,000 1,500 cubic meters 20,000,000 19,500,000 19,000,000 18,500,000 18,000,000 17,500,000 number of vessels 1,450 1,400 1,350 1,300 1,250 17,000,000 1,200 16,500, , Source: Lloyds, Citi Research Source: Lloyds, Citi Research As LPG fleet utilization has tightened since 2009, spot charter rates have risen; recent spot rates have been near $80k/day. Average spot rates for 2011 and 2012 were around $30k/day, rising to near $36k/day in 2013 and nearly $70k/day in With the existing fleet already near high levels of utilization, incremental US exports of 0.9-mb/d by 2020 will require more shipping capacity. The LPG shipping order book, at around 40% of the current fleet, shows the potential for strong fleet expansion. While the order book offers encouraging signs of capacity expansion through 2017, it does not always guarantee ships will be delivered, and offers little insight past Whether the timing and pace of new ship deliveries (see Figures 10 and 11) is matched to US export facility expansion will be important to watch. Figure 26. Cumulative LPG ship additions Figure 27. Cumulative LPG ship additions after adjusting for voyage time (over 50 days roundtrip with additional days for loading/unloading) Estimated capacity (mb) Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Deadweight (mt) mb/d Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Thousand BBLs Sum of DWT Source: Lloyds, Citi Research Source: Lloyds, Citi Research Note: Estimates subject to uncertainty over final ship deliveries and ship specifications Based on approximations for different ship types and an assessment of the order book we estimate around 900-kb/d equivalent ships are already in the order book, to be delivered by Set against new fleet requirements also around 900-kb/d, though to 2020, fleet expansion appears on track to meet US 2 This is an estimate subject to change. 12

13 export needs. While this does not account for export growth in other regions, further fleet expansion from could help expand the fleet even more. Though given the market is already tight, periods of tightness could occur if lumpy export capacities come online and deliveries lag for a period. Faster steaming of the existing fleet will be a relief valve for spot rates if this happens. (c) Long-term: A global supply glut? In the longer run, export markets may not be able to fully absorb this domestic oversupply without some price compression. Exports for global petchem use would have been a good outlet for excess NGL supply, if not for the sharp decline in oil prices, which makes naphtha much more competitive globally as a petrochemical feedstock. Moreover, exports should have a differentiated impact on NGL pricing, potentially helping to support LPG (propane and butane) prices, which are easier to export and already have significant infrastructure for exporting in place/planned, though this benefit is relative to depressed price levels seen in 2Q 15. On the other hand, ethane may find least price support in global markets due to the high cost of transport. Figure 28. Regional LPG surplus/shortage shows that some excess North American production can be absorbed by growing Asian demand mb/d Middle East Asia FSU Lat Am Africa North America Europe (0.5000) (1.0000) (1.5000) (2.0000) Source: FGE, StatCan, EIA, Citi Research Figure 29. but global LPG surplus/shortage may grow to nearly 0.5- mb/d by 2020 mb/d Source: FGE, StatCan, EIA, Citi Research However, of concern is that rising LPG alongside rising condensate production could compete with each other in the export market, thereby lowering global prices of both. These barrels could push their way into the global market and directly compete for end markets in various sectors including petrochemicals and transportation. Why? The US is on course to export sizeable amounts of LPG and condensate, the latter of which has a high naphtha yield. Meanwhile, petchem is a significant consuming sector for both naphtha and LPG. But since petchem production depends on the demand in the end-use market, which is driven by global economic performance and limited by facility capacity, global demand may not be able to absorb an oversupply of naphtha and LPG. Hence, LPG and naphtha could engage in inter-fuel price competition, driving down the prices of each. 13

14 Figure 30. LPG Production by Region (kb/d) Regions World Middle East Asia FSU Lat Am Africa North America Europe Source: FGE, EIA, StatCan, Citi Research In the end, the amount by which global prices may fall will depend partially on how much of the additional supply can be absorbed by petrochemical, transportation (for naphtha) and heating demand (for propane). But this additional supply is entering the global market at a time when global demand growth of light-ends could slow due to rising fuel efficiencies and an economic slowdown in China. If faltering demand is unable to absorb the supply, this could lead to weaker light-ends pricing globally. Further, long standing global price-setting practice could be upended as US supply surges, giving buyers with other supply options. A differentiated look at NGL markets In the following sections, we look specifically at each NGL market and the particular dynamics of those markets including pricing and sector impacts. Ethane (C2) Figure 31. EIA PADD regions Source: EIA Petrochemical demand for ethane, which accounts for nearly all US ethane demand, should see robust growth in the years to come as favorable pricing of ethane versus other NGLs incentivizes its use as a feedstock. Several planned ethylene crackers are expected to come online between now and However, there is downside risk to this demand growth in a lower oil price environment, as low oil prices could lower new project returns; some projects that have not yet begun construction may face greater headwinds of starting, while plants already under construction may see more modest utilization rates. On the production side, ethane production has surged with the rapid production growth of shale gas. Despite an expected slowdown of gas production growth in 2016, gas production should continue to rise through to 2020, albeit at a more moderated pace. This rapid production growth has led to a phenomenon called ethane rejection. As ethane supply outpaces demand, the premium that ethane has over natural gas falls sharply. Thus, oversupply cuts down the incentive to strip ethane out of the gas stream, leading to ethane rejection, when excess ethane is left in the natural gas stream. In all, we forecast that ethane production could increase to 1.8-mb/d by 2020, not including ethane rejection, but ethane rejection could account for ~0.3-mb/d of additional ethane production, which would bring our estimate closer to 2.1-mb/d by 2020 Thus, if all planned crackers come online and are fully utilized, we expect the ethane supply surplus (production minus demand) to reach 0.4-mb/d in This includes ethane rejected and left in the natural gas stream. Some of this oversupply may find an outlet through growing capacity for ethane exports, though economics overseas of importing ethane could increasingly be a limiting factor, particularly as oil (and therefore naphtha) prices stay low. 14

15 Interregional movements More ethane is expected to flow from PADDs I and IV to PADD III due to a regional imbalance between oversupply in the Northeast and Rockies and rising demand in PADD III where most of the new petrochemical plants are expected to be located. Several pipelines moving NGLs from the Northeast to PADD III are already online, including Utica Marcellus Texas (430-kb/d, PA to LA) and ATEX (125-kb/d, PA to TX). However, the current slate of NGL pipelines out of the Northeast may not be enough to relieve the supply surplus, partly because of the challenging economics of transporting ethane from the Northeast to the Gulf Coast. While pipelines taking NGLs down to the Gulf Coast seem to be a default solution, pipeline tariffs on shipping liquids from the Northeast down to the Gulf Coast could substantially erode the economics of liquids. Ethane is already priced at close to natural gas parity on the Gulf Coast. But unless gas prices there are much higher than the Northeast to cover the difference in ethane transport costs, the netback of shipping ethane south may not be all that advantageous vs. blending it in the gas stream locally or exporting it out of the US. Pipeline takeaway and exports Exports could be a better way out of limited opportunities to consume and reject ethane. Besides the original Marcus Hook facility on the East Coast and EPD s 240- kb/d ethane export terminal on the US Gulf Coast (3Q 16), pipelines to Canada could support an additional 100-kb/d of exports. However, how much US ethane the global market could consume remains questionable. Oil prices have collapsed from the $100/bbl range to the $50-60/bbl neighborhood. A long term oil price of ~$70/bbl and an oversupply of naphtha would lower naphtha prices to between $5 and $10/bbl below crude. Such low prices severely challenge importing countries appetite for importing refrigerated ethane from the US which competes directly with locally sourced naphtha. Propane (C3): Propane markets also are expected see significant oversupply in the coming years. While propane production is expected rise alongside gas production, the outlook for domestic demand suggests that much of this production cannot be absorbed domestically. Indeed, with production expected to grow to ~2.0-mb/d by 2020, the supply overhang is expected to widen to 0.6-mb/d. Domestic demand for propane is mainly driven by three sectors: Heating demand in the winter (and summer to heat swimming pools), transport demand and petchem feedstock demand mainly in PADD III. Heating and transport demand are not expected to see significant growth into Unlike for ethane, petchem demand for propane should remain flat to slightly higher because inexpensive ethane generally limits the share of propane as a feedstock, though narrower ethanepropane price spreads could make propane more attractive. Several propane dehydrogenation (PDH) plants, which process propane to produce propylene, are expected to come online by 2020, and should contribute some growth to domestic demand for propane. Indeed, if all planed plants come online and are fully utilized, PDH demand could contribute ~140-kb/d in incremental domestic propane demand. Nevertheless, the domestic market is set to remain oversupplied. 15

16 Figure 32. PDH demand for propane should add ~140-kb/d of incremental demand by 2020 kb/d Source: Citi Research Exports The key to more robust pricing comes from LPG exports. We estimate 1.6-mb/d of LPG could reach the global market by the end of 2016, assuming all sanctioned projects come online and are fully utilized. It is our view that these barrels will push their way into the global market and directly compete with other fuels such as naphtha. Said another way, U.S. propane exports can be seen as the equivalent of supplying incremental crude barrels to the global market. However, better transport/storage economics for propane versus ethane should help US propane exports compete in the global market. For propane, as the production glut is relieved over time, the beneficiaries of improved pricing as a result of exports include firms with liquids-associated infrastructure, liquids-heavy producers and G&P MLPs with keep-whole and/or percent-of-proceeds processing contracts. Alternatively, higher prices could squeeze retail propane margins if operators could not pass higher prices onto customers. Butane and Isobutane (C4): Butane and Isobutane production is increasing in tandem with the rest of the NGL complex but domestic demand should stay relatively flat, albeit with strong seasonality due to its use as a gasoline blendstock. Butane is mainly used as blendstock of gasoline, feedstock of the petchem industry, and input into isomerization units to produce isobutane. As US gasoline demand growth by 2020 will likely be flat to negative, butane demand as a gasoline blendstock should fall. Again, the petchem industry is also mainly expanding ethane-based facilities, so that feedstock demand should also stay flat. The demand for isomerization should also not change much due to the limited usage of isobutane. Thus, again exports will be needed to relieve the expected glut. We expect butane and iso-butane prices in particular to benefit from LPG export capacity expansions. Already butane exports are increasing substantially, rising from 30-kb/d in 2013 to 74-kb/d in Moreover, the physical characteristics of butane make it easier to export compared to ethane and propane and these markets are also much smaller compared to the overall domestic propane market. Combined the butane/iso-butane market is ~0.5-mb/d compared to the propane market that is more than double the size at 1.2-mbl/d. 16

17 Beneficiaries of improved pricing will be G&P MLPs with commodity sensitive processing contracts; whereas MLPs with exposure to domestic butane blending could see lower than normal margins. Pentane-Plus (C5) and Condensate: Pentane-plus is effectively plant condensate, which is similar to field condensate from oil wells. Pentane plus is used in petrochemical processes and gasoline making. US condensate is composed of field condensate, which comes directly from oil wells, and plant condensate, which is separated from wet gas after passing through a gas processing plant. There is no distinction between the two elsewhere globally and there is no difference molecularly. The production of plant condensate (pentane plus) from NGLs and field condensate from oil wells should keep rising. The high naphtha yield of plant and field condensate should lead to higher naphtha production, wherever they are delivered, refined and processed globally. Gasoline: Slowing global gasoline demand growth should be less meaningful in absorbing more naphtha. Despite growing demand for gasoline from the developing world, particularly China, rising fuel efficiency standards and declining demand in Western Europe and North America suggest that demand growth for gasoline will likely progress more slowly than in the past. Figure 33. Cumulative gasoline demand growth vs growth in China and other developing regions is partly offset by declining demand in Western Europe and the US (Base case) Figure 34. Cumulative gasoline demand growth vs 2014 in base case and high efficiency case - if new car fuel efficiency standards exceed expectations by 5% demand growth will slow even further mb/d India mb/d Base Case 5% Greater Efficiency Gains China South Korea Japan United Kingdom Spain Italy Germany France Mexico Canada United States Source: Citi Research Source: Citi Research Improving car fuel efficiency standards may have a dramatic impact on gasoline demand. This will be particularly true if new car fuel efficiency standards were to increase more quickly than expected or if a growing number of electric vehicles on the road helps to improve overall fleet efficiency. With gasoline demand growth slowing, the strong demand for naphtha for gasoline processing may weaken. 17

18 18

19 Faisel Khan, CFA Robert S Morris Equities View In the next three sections, we analyze the companies exposed to natural gas liquids. Citi s Commodities Team's views on pricing have an impact on all the companies we cover involved in the natural gas liquids value chain. P.J. Juvekar Oscar Yee Within the upstream sector, companies such as Range Resources and Antero are trying to maximize their netbacks through increased market access. These market access solutions take time to develop and require a coordinated effort with both midstream and downstream participants. Within the midstream sector, companies such as Enterprise Products have come up with processing, pipeline and export solutions in order to maximize the netbacks for their producer customers. These projects are underwritten with long-term contracts by both producer and downstream customers. Within the downstream sector, chemical companies and refiners are trying to minimize their feedstock costs to maximize margin. In some cases these downstream companies will attempt to access multiple markets in order to minimize their costs. Below, we list a number of companies involved in the NGL value chain that are impacted by Citi s Commodities Team's views on NGL prices. Figure 35. North American Equities Exposed to Theme Benefits NGL Exposure Partnership / Current Target Upside from Higher Equity Feedstock Company Ticker Rating Price Price to Target NGL Prices Production Transports Exports Consumer Upstream Antero Resources AR 1 $31.24 $ % Yes Yes Yes Chesapeake Energy CHK 2 $10.90 $ % Yes Yes No Eclipse Resources ECR 2 $4.62 $ % Yes Yes Yes Range Resources RRC 2 $46.11 $ % Yes Yes Yes Southwestern Energy SWN 2 $21.54 $ % Yes Yes No Cimarex Energy XEC 2 $ $ % Yes Yes No Devon Energy DVN 1 $55.40 $ % Yes Yes No Pioneer Natural Res PXD 2 $ $ % Yes Yes No Midstream Enterprise Products EPD 1 $30.35 $ % Yes Yes Yes Yes Yes DCP Midstream DPM 1 $32.92 $ % Yes Yes Oneok Inc OKE 2 $41.20 $ % Yes Yes Yes ONEOK Partners OKS 2 $35.24 $ % Yes Yes Yes Sunoco Logistics SXL 1 $38.28 $ % No Targa Resources GP TRGP 1 $90.02 $ % Yes Yes Yes Yes Targa Resources LP NGLS 1 $40.78 $ % Yes Yes Yes Yes Downstream Dow Chemicals DOW 1 $51.94 $ % No Yes Eastman Chemical EMN 1 $77.86 $ % No Yes LyondellBasell Industries LYB 1 $99.45 $ % No Yes Transportation Navigator Holdings NVGS NA $19.17 NA Yes Yes Dorian LPG LPG NA $16.89 NA Yes Yes StealthGas GASS NA $99.45 NA Yes Yes Source: Citi Research 19

20 Robert S Morris Equities Upstream NGL prices have been weak this year, especially propane. Propane storage is at record levels. This weakness was put into the spotlight when Antero Resources revised down its 2015 full-year guidance for NGL prices (see note). Fluctuations in NGL prices impact Citi's E&P coverage group with varying sensitivities. However it is most acute for Appalachia producers given this region is driving the majority of domestic NGL supply growth over the next several years. Products out of the Marcellus are incurring higher transportation cost to reach endmarkets. Upstream companies are employing varying strategies regarding their NGL marketing arrangements which result in different netback for each producer. In the table below, we analyze the bottoms up NGL production growth of Citi upstream producers in the Appalachia. We also summarize the nuances of each producers NGL marketing arrangements (Antero, Chesapeake, Eclipse, Range, and Southwestern), and draw conclusions regarding relative share price performance for these producers over the next 12-months. Supply Growth Based on actual production volumes by our E&P study group in the Northeast, including Antero, Chesapeake, Eclipse, Range, and Southwestern, as well as aggregate NGL volumes from the EIA, our group accounted for a majority of the region s NGL production growth. In the Marcellus (PADD 1 Appalachia), we estimate this group will increase total NGL production by ~28 MBbls/d in 2015 (up 34% year-over-year), by ~39 MBbls/d in 2016 (up 35% year over year) and ~39 MBbls/d in 2017 with ~26% year over year growth (see figure below). This robust volume growth reflects the rotation by Range Resources of a portion of drilling activity into the dry-gas from the liquids rich regions (beginning Q2 14). Assuming the E&P producers in our study group continue to represent ~52% of the regions NGL production, and the producers not in our study group grow NGL production at the same average rate, we estimate total Marcellus NGL production will grow ~62 MBbls/d in 2015, by ~88 MBbls/d in 2016, and ~88 MBbls/d in We note that our 2015 NGL growth estimates are below MarkWest Energy s (MWE) guidance of ~50% year-over-year growth in their processed NGL volumes in the Marcellus, implying further upside to our aggregate estimates in our view. According to MarkWest, its processing volumes currently account for ~75% of total Appalachia NGL production Marcellus and Utica - and the company processes 100% of the volumes for Antero, Southwestern, Range, and Eclipse Resources in our study group. 20

21 Figure 36. Marcellus NGL Production Growth E&P Producer Data And Implied Appalachia Production Growth PADD 1 - Appalachia NGL Production (PA, WV) E 2016E 2017E Antero - Marcellus* N/A 5,315 16,025 27,791 41,425 59,183 Range Resources 0 19,762 46,803 59,932 77,451 93,685 Southwestern - Marcellus (CHK pre-2015) 4,043 6,826 19,880 23,011 30,540 35,137 Total NGLs Production 4,043 31,902 82, , , ,005 *AR Data Includes Condensate Total NGL Production Growth (y/y) +27, , , , ,589 Total NGL Production Growth (y/y) N/A 159% 34% 35% 26% EIA Total "PAAD 1 Appalachia" NGL Volumes (Bbls/d) 45,250 86, ,750 N/A N/A N/A Producer Group (% of Total Appalachia)** 11% 44% 52% 52% 52% 52% Implied Total "PAAD 1 Appalachia" NGL Production** 45,250 86, , , , ,993 Implied Total "PAAD 1 Appalachia" NGL Production Growth (y/y)** +41, , , , ,053 Source: Citi Research, Company Reports, EIA In the Utica (PADD 2 Ohio), we estimate our study group will increase total NGL production by ~17 MBbls/d in 2015 (up 57% year over year), by ~11 MBbls/d in 2016 (up 23% year over year) and ~18 MBbls/d in 2017 with ~30% year over year growth (see figure below). This robust volume growth reflects the rotation in all drilling activity by Eclipse Resources (beginning Q1 15) into the dry-gas from the liquids rich regions in the Utica. Assuming the E&P producers in our study group continue to represent ~34% of the regions NGL production, and the producers not in our study group grow NGL production at the same average rate, we estimate total Uitca NGL production will grow ~44 MBbls/d in 2015, by ~38 MBbls/d in 2016, and ~62 MBbls/d in We note that our 2015 NGL growth estimates for just Antero (Utica) and Eclipse Resources (excluding Chesapeake with processed volumes via Access Midstream) are ~91% year-over-year growth this year which is inline to slightly below MarkWest Energy s (MWE) guidance of ~95% year-over-year growth in their processed NGL volumes in the Utica. Figure 37. Utica NGL Production Growth E&P Producer Data And Implied Appalachia Production Growth PADD 2 NGL Production (OH/Utica) E 2016E 2017E Antero - Utica* 0 1,051 6,950 10,920 16,262 23,211 Chesapeake Energy - Utica 618 4,182 22,021 31,588 35,966 42,196 Eclipse Resources 0 4 1,460 5,325 6,406 11,097 Total NGLs Production 618 5,236 30,430 47,834 58,634 76,504 *AR Data Includes Condensate Total NGL Production Growth (y/y) +4, , , , ,870 Total NGL Production Growth (y/y) 748% 481% 57% 23% 30% EIA Total "PAAD 2 I-I-K" NGL Volumes (Bbls/d) 85,250 83, ,750 N/A N/A N/A Producer Group (% of Total Appalachia)** 1% 7% 30% 34% 34% 34% Implied Total "PAAD 2 I-I-K" NGL Production** 85,250 83, , , , ,850 Implied Total "PAAD 2 I-I-K" NGL Production Growth (y/y)** -1, , , , ,565 Source: Citi Research, Company Reports, EIA Combining our bottoms up analysis for the Marcellus and Utica, and assuming our study group continues to represent 52% of the Marcellus output and 34% of the Utica output, we estimate total Northeast NGL production growth of ~106 MBbls/d 21

22 this year, increasing to 126 MBbls/d next year and ~150 MBbls/d in Further, our bottoms up analysis is directly in line with Citi Commodities Team s 2015 through 2017 forecasts for the Northeast producing region (portions of both PADD 1 and PADD 2) NGL production forecasts. Figure 38. Total Northeast (PADD 1 & PADD 2) Implied NGL Production Growth E 2016E 2017E Implied Total Marcellus & Utica NGL Production** 170, , , , ,843 Implied Total Marcellus & Utica NGL Production Growth (y/y)** +39, , , , ,618 Source: Citi Research, Company Reports, EIA Marketing and Take-Away Capacity Overview Figure 39. NGL Pipelines Source: EIA Antero lowered full-year 2015 NGL pricing guidance on June 10 th by $8.44/Bbl (~$0.20 per gallon) as a combination of lower propane prices, and lower netbacks after transportation expense in Appalachia negatively impacted price realizations throughout Q2 15. We believe the situation will persist through the remainder of Notably, NGLs transport via rail to the Gulf Coast (Mt. Belvieu) is being utilized to a much greater extent this year vs. last year to evacuate an oversupplied Northeast NGL market and is having a significant impact on realized prices given the ~$8.40/Bbl ($0.20/gal) transportation cost. Antero currently relies on MarkWest Energy to process all of its rich gas production and market the NGL components via pipeline, trucking, and rail. Other E&P producers similarly rely on either MarkWest or peer natural gas processors in the region to both process their liquids-rich natural gas and to market these purity products to end users. Thus, a broader industry issue has developed this year which is impacting other operators in the Appalachia region, not just Antero and the added supply is driving down prices in other markets, including Mt. Belvieu. Also, 22

23 this is a recent development as the NGLs marketing calendar typically occurs in Q1 to lock in contracts for the forward year running April through March of the following year. Propane, Butane and Condensate Each E&P company has different NGL marketing arrangements and realized pricing. Export markets are being developed via the supply-push and pipelines are being built to reliably deliver these volumes at a lower cost than rail or truck. Range Resources, in particular, is in a strong marketing position given the benefit of having access to export markets via pipeline this year. Range has secured transportation on Mariner East I which we believe has a lower tariff than Mariner East II. The complete pipeline tariff has not been provided. We believe Mariner East I is at a lower cost than Mariner East II given that a previous 8 pipeline on the system was repurposed for the project instead of a complete new-build. Range Resources holds 20 MBbls/d of propane transportation capacity on Mariner East I, which has a total ~70 MBbls/d of ethane and propane mix capacity from the Houston plant in PA to the Marcus Hook export terminal. Range has previously provided that the all in propane netback should improve by $0.20/gal (or $8.40/Bbl) with the lower transportation cost vs. its current marketing arrangement as part of the pooled MarkWest system. Figure 40. Appalachia C3+ Pipeline, Rail, and Truck Marketing Map Source: MarkWest Energy This past December, Range began to deliver its share of ~133 MBbls of propane for line fill on the Mariner East I pipeline project which is expected to be fully operational in late Q3 15. Once operational, Range will deliver the 20 MBbls/d contracted on Mariner East I which is expected to yield a $0.20/gal ($8.40/Bbl) savings in transportation costs. Thus, Range is poised to differentiate itself from its peers in 2016 regarding NGL realizations and netbacks. 23

24 Antero has firm volume commitments of 61.5 MBbls/d (~22% of total project capacity) with 11.5 MBbls/d of ethane, 35.0 MBbls/d of propane, and 15.0 MBbls/d of butane. With a late-2016 in-service date for Mariner East II, Antero will then move these volumes out of the Markwest marketing system and onto pipelines to the Marcus Hook export terminal. Mariner East II has a total project capacity of 275 MBbls/d with other shippers, including Eclipse Resource. For propane, most of the volumes will likely be shipped to South America during the low demand summer period while the local Northeast market remains robust during the winter months, and crop-dry is an added source of demand in the Fall. However, through the remainder of this year and into next year, Antero and others will continue be impacted by lower domestic C3+ prices and the higher, rail transportation costs to move these barrels to market. Antero estimates an average 2015 propane price realization of ~$11.85/Bbl, a blended ~$7.65/Bbl discount to the current Mt. Belvieu propane strip price of $19.50/Bbl. Based on our estimates, the C3+ market in the northeast is likely to remain oversupplied in 2016 until Mariner East II improves the balance. This should be slightly offset by higher Mt. Belvieu pricing according to Citi Commodities Team s estimates. Other Appalachia producers in our coverage group with significant NGL production include Chesapeake Energy and Southwestern Energy through their acquisition of Chesapeake s West Virginia liquids rich Marcellus asset. However, neither of these companies has secured capacity on either Mariner East I or II. Ethane RRC and AR remain best positioned to access international markets for ethane with firm sales agreements in place. Range Resources is best positioned to market its ethane given the diversity of their transportation agreement. Range appears to be a year ahead of Antero and others. The company currently has 10 MBbls/d of firm transportation on the underutilized ATEX pipeline down to Mt. Belvieu along the Gulf Coast. However, Range will benefit from a 10 MBbls/d firm sales agreement with Sasol (NYSE: SSL) for their Lake Charles, LA ethane cracker which is currently under construction. The contract is anchored by a natural gas plus pricing arrangement. Range s pipeline tariff on ATEX is $0.145/gal, implying a natural gas plus contract would yield a slight profit on volumes with, for example, $3.00/Mcf ($21/gal), which is above the cost of transportation $0.145/gal and processing/fractionation estimated at $0.07-$0.10/gal. Range s capacity on ATEX increases to 20 MBbls/d in Chesapeake, Southwestern and Antero also have capacity on ATEX. However, Antero does not utilize any of its 20 MBbls/d of firm transportation capacity and instead elects to reject ethane and sell it as a BTU uplift in the natural gas stream. Chesapeake and Southwestern have noted that the netback after transportation expense is flat to negative. Range also has 15 MBbls/d of firm transportation capacity on Mariner West which is a 47 MBbls/d ethane-only pipeline from the Houston plant in PA to Sarnia, Canada. Pricing is indexed to Appalachia gas prices however, no transportation costs are incurred. There is additional capacity on the Mariner West system, however, producers continue to elect to reject ethane into the natural gas stream to improve prices rather purchasing transportation capacity on these pipelines. Range s most profitable outlet for ethane is the 20 MBbls/d of ethane transportation capacity on Mariner East I which will allow it access to the export markets via Marcus Hook and is linked to a firm sales agreement with the European chemical company INEOS for its plant in Norway and Scotland. CONSOL Energy (NYSE: CNX) and others also have firm sales agreements with INEOS and firm transportation capacity on Mariner East I in Q

25 Antero has 11.5 MBbls/d of ethane firm transportation capacity on Mariner East II, which it plans to utilize when the project becomes operational in late Furthermore, Antero has a firm sales agreement for the same 11.5 MBbls/d of volumes with the Austrian petrochemical company Borealis for its plant in Sweden. Neither Chesapeake Energy nor Southwestern Energy have capacity on Mariner East I or II, and instead have underutilized capacity on ATEX only. Figure 41. Appalachia Ethane Pipeline Marketing Map Source: MarkWest Presentations Need for New Pipeline Projects New pipeline proposals are holding open seasons, which further strengthens our view that the Appalachia market needs more outlets for NGLs beyond 2017 in order for producers to execute their growth trajectories. Kinder Morgan has plans for the Utopia East system which will move an initial 50 MBbls/d of ethane and/or propane from Appalachia to Windsor, Ontario and the Utopia West project to access the Chicago market. The Utopia East project is supported by a firm transportation agreement with NOVA chemicals to source feedstock for a plastics plant and would be placed into service in early-2018 pending FID. Kinder Morgan has also proposed the Utica Marcellus Texas Pipeline (UMTP) to transport NGLs to the Gulf Coast with an expected in-service data of late-2018 pending FID. Thus, Antero s Propane and Butane capacity on Mariner East II seems rightsized for their average 2017 volumes, but will still need to find a market for additional growth beyond 2017 (including the Northeast or Mt. Belvieu). Using Antero s guidance for the average 2015 NGL Bbl by component (1% ethane, 57% propane, 25% Butanes, 16% Natural Gasoline) and our production estimate of ~35 MBbl/d on average (slightly above mgmt. guidance of ~33 MBbls/d given our higher ~42% year-over-year growth assumption), we estimate ~20 MBbls/d of propane production, 5.2 MBbls/d of Normal Butane, and ~3.8 MBbls/d of Iso-Butane this year. Using the same NGL mixture and a ~39% year-over-year production growth estimate for 2016, we estimate Antero will produce an average of ~29 MBbls/d of propane, ~7.5 MBbls of Normal Butane, and ~5.8 MBbls/d of Iso-Butane. 25

26 Thus, Antero s Propane and Butane capacity on Mariner East II seems right-sized for their average 2017 volumes, but will still need to find a market for additional growth beyond 2017 (including the Northeast or Mt. Belvieu). Again, Antero has 28 MBbls/d of gross propane capacity on Mariner East II, 12 MBbls/d of gross butane capacity, and partial ethane recovery to fill the 11.5 MBbls/d of ethane capacity. Eclipse Resources also has ethane and butane sales agreements on Mariner East II through its Midstream partner s capacity. Range Resources is in a similar marketing situation where the Propane capacity on Mariner East I seems rightsized for their average 2017 volumes, but will still need to find a market for additional growth beyond Range Resources is in a similar marketing situation where the propane capacity on Mariner East I seems right-sized for their average 2017 volumes, but will still need to find a market for additional growth beyond 2017.Using Range s guidance for the average NGL Bbl by component in Q4 14 (50% ethane, 28% propane, 13% Butanes, 9% Natural Gasoline) and our 2015 production estimate of ~64 MBbl/d on average (in line with mgmt. guidance of ~20% y/y total production growth), we estimate ~30 MBbls/d of ethane production, ~17 MBbls/d of propane production, 5.4 MBbls/d of Normal Butane, and ~2.4 MBbls/d of Iso-Butane this year. Using the same NGL mixture and a ~20% year-over-year production growth estimate for 2016, we estimate Range will produce an average of ~39 MBbls/d of ethane and ~22 MBbls/d of propane. Again, Range has a total of 55 MBbls/d of gross ethane capacity on ATEX, Mariner West, and Mariner East I as well as 20 MBbls/d of gross propane capacity. Upstream Equity Conclusion Range Resources remains best positioned to weather lower domestic NGL prices. However, Q2 and Q3 prices could be the weakest in recent history. In 2015 and 2016, Range Resources remains best positioned to weather lower domestic NGL prices. However, Q2 and Q3 prices could be the weakest in history along with its peers in the Northeast. Further, Range reports ethane production in its NGL price realizations vs. others (including Antero) which reject ethane and report revenue as an uplift to natural gas prices. This makes an apples-to-apples comparison of NGL realizations (and natural gas price net-backs) difficult. In the figure below, we show a breakdown of each of our E&P company s NGL exposure and estimated realized price per barrel in 2015, noting that the value of each companies average NGL barrel will naturally vary given different share of each of the components (ethane, propane, etc.) as well as each companies reporting of transportation costs (either via a discount to realized price or as a component of Transportation Expense). One June 10 th we lowered our 12-month price target on Antero by $2 per share to $46 per share as we reduced our cash flow estimates for 2015 and 2016 in aggregate by ~$125mm ($0.45 per share) adjusting for lower NGL realizations in both 2015 and 2016, slightly offset by realized propane hedging gains. Meanwhile, in a separate note for Range Resources we maintained our 12-month price target of $56 per share as we reduced our cash flow estimate for 2015 by ~$8mm ($0.05 per share) and maintained our 2016 estimates given access to lower cost pipeline transportation and a strong export market relative to domestic prices. However, as shown in Figure 7 below, Range Resources has traded ~3% above shares of Antero since Antero revised its guidance on June 10 th meanwhile SWN has outperformed and Eclipse Resources has underperformed. Eclipse Resources is exposed to the downturn in NGL prices in 2015 and 2016, however a majority of their production is natural gas (est. ~68% in 2015 and ~46% in 2016). We estimate NGLs as a percentage of total production of ~17% of 2015 production and ~13% in Thus, a decrease in our NGLs price realization to ~$18/Bbl (~30% of WTI) would reduce our 2015 cash flow estimates by ~$7mm ($0.03 per share) and our 2016 cash flow estimates by ~$20mm ($0.08 per share). Given the significant underperformance of ECR shares, despite positive indications 26

27 of current production and the refinancing of its senior notes at a lower interest rate, we would not expect ECR shares to underperform its other Appalachia peers. Further, we attribute the relative underperformance of CHK and ECR to factors outside of NGL prices. However, we highlight that the recent, sever weakness in NGL prices are likely not fully reflected in consensus earnings estimates for the entire E&P group and that the differentiation by producer in 2016 may not be fully appreciated by consensus. Figure 42. Study Group Share Price Performance YTD RICE, E&P Index, 90.3 RRC, 88.6 SWN, 81.4 AR, 77.0 Propane (Mt. Belvieu), 73.9 ECR, CHK, December-14 January-15 February-15 March-15 April-15 May-15 June-15 Source: Bloomberg, Citi Research E&P Index Propane (Mt. Belvieu) RRC AR SWN CHK ECR RICE 27

28 Figure 43. E&P NGL Exposure Ticker 2015 Production % NGLs 2015 NGL $/Bbl (pre-hedge) RRC 33% $10.97 XEC 25% $16.70 DVN 20% $9.95 PXD 20% $14.55 EGN 18% $15.50 NFX 16% $18.99 AR 16% $17.48 APC 15% $17.27 ECR 13% $16.68 ECA 13% N/A EOG 13% $16.44 APA 12% $11.87 EPE 12% $14.29 CHK 11% $7.08 MRO 9% $16.22 NBL 9% $14.34 WLL 7% $15.60 SWN 7% $13.12 CXO 0% N/A COG 0% N/A KOS 0% N/A OAS 0% N/A CNQ 0% N/A CIE N/A N/A Source: Citi Research Of the 28 companies in our E&P coverage group, excluding the Appalachian producers mentioned above, we estimate five producers will experience the largest hit to their bottom line with over 15% of their 2015 production exposed to NGLs: Cimarex Energy (~25%), Devon Energy (~20%), Pioneer Natural Resources (~20%), Energen (~18%), and Newfield Exploration (~16%). We also note that both Concho Resources and Oasis Petroleum report production volumes on a 2- stream basis, thus the value of NGLs is reported as natural gas and both companies would also have an impact from changes in NGL prices. Figure 44. NGLs as a % of Estimated Total 2015 Production 35% 30% 25% 20% 15% 10% 5% 0% Note: Excludes producers with the 2-stream reporting convention, including CXO and OAS Source: Citi Research 28

29 Faisel Khan, CFA Equities Midstream With Citi s Commodities Team forecasting a three phase movement in NGL prices through 2020 i.e. depressed prices for the remainder in 2015, followed by resurgence in 2016 and eventual stabilization in 2017, we see a varied impact on our midstream coverage names, however this impact is not greater than ~5% of next year s Distributable Cash Flow (DCF). We maintain Buy ratings of EPD, DPM, MWE, and PAA; have upgraded NGLS and SXL to Buy; and reiterate our Neutral rating on OKS. Gathering & Processing activities: Large integrated assets coupled with marketing activities preferable In terms of G&P activities, we see compressing fractionation margins as a slight headwind to earnings (for the remainder of 2015) in names that have exposure to Keep Whole and POP contracts in their NG Processing operations. However margin compression is mitigated by the utilization of integrated assets and marketing activities to either increase volumes/throughput or optimize realized NGL prices respectively. Figure 45. G&P Operations of Select Midstream MLPs G&P Contract Profile 2015E EBITDA ($mm) Partnership Ticker Citi Rating Price Target ($/Unit) % Commodity % Fee Basin Exposure NGL Exposure Enterprise Products EPD 1 $ % 80.0% Diversified High $5, % Plains All America PAA Diversified Low 2, DCP Midstream DPM Diversified High Oneok Partners OKS Bakken High 1, Targa Resources NGLS Diversified/Permian High 1, MarkWest MWE Marcellus/Utica High Sunoco Logistics SXL Diversified Low 1, % Sensitivity to 2016E DCF Average 24.9% 75.1% 1.79% Source: Citi Research We refreshed our 2015E EBITDA estimates for select midstream names under our coverage that have exposure to G&P operations. The revision of EBITDA takes into account the decline in NGL prices forecasted by Citi s Commodity Team for the remainder of this year. We also analyzed a case to determine the impact on Distributable Cash Flow (DCF) if the group were subjected to a further 10% sensitivity in commodity prices in 2016E. Our analysis indicated that spectrum of variability/risk in EBITDA (and subsequently DCF) varied with key factors being NGL exposure, basin diversification and % commodity vs % fee contract mix. We estimate the largest impact on 2015E EBITDA to occur on the larger integrated names namely EPD and PAA, representing approximately 3.2% and 2.5% of their 2016E DCF respectively. Although both names have higher sensitivity to NGL prices movements we believe that further deterioration in EBITDA beyond a 10% move in NGL commodity prices may be mitigated due to large diversified operations and marketing activities at both partnerships. Interestingly the most similar company to both EPD and PAA i.e. SXL had virtually no risk of NGL movement. We believe this is due to a combination of SXL s take-or-pay contract portfolio and its lower exposure to direct NGL commodity prices. On a brighter note however none of the names had an impact above 4.0% to 2016E DCF from a 10% movement in commodity prices. We believe this is reflective of the industry s efforts to reposition NG processing contract portfolios to incorporate a greater fixed fee component and more aggressive hedging strategies. 29

30 Impact on Pipelines & Export activities: We believe that the impact on pipeline utilizations will be minimal. Our conclusions are driven by our thoughts that NGLs will try to move to higher net back markets but will face roadblocks in getting there. Specifically these road blocks include: 1. Transportation rates when trying to capture local netbacks/spreads 2. Higher vessel day rates (due to lower vessel availability) when trying to export. Figure 46. Pipelines with exposure to Northeast NGL glut Name In-Service Year Parent End Market Market Type Primary NGL Mariner West 2013 SXL Sarnia, Industrial Ontario /Chemical Ethane Mariner East SXL Europe Local / Ethane, Propane, Export Butane ATEX Pipeline 2014 EPD Gulf Coast / Local Ethane, Propane, South Consumption Butane Pipeline Capacity Name 2015E 2016E 2017E Export Facility Utilization Impact Mariner West 50,000 50,000 50,000 N/A Mariner East (1) 70, , ,000 Marcus Hook ATEX Pipeline 190, , ,000 Source: Citi Research, Company press releases Houston Ship Channel (1) Mariner East I (70k Bbl/d) already in service, Mariner East II (275k BBl/d) in-service Q SXL Pipelines: Mariner East I: Mariner East I is a pipeline project developed by SXL to deliver NGLs from the Marcellus/Utica Shales in Western Pennsylvania to Marcus Hook, Pennsylvania. Mariner East I commenced operations in Q with an estimated daily capacity of 70,000 barrels per day of mainly propane. Additional refrigeration capability has been added to the project to allow a similar amount of Ethane to be transported to Marcus Hook by Q Based on SXL s guidance of achieving ~6.0x multiple for its projects we estimate EBITDA to be approximately $50-60mm for Mariner East I Lower NGL price Impact on Mariner I: Given that almost 100% of capacity on Mariner I systems has been contracted on a take or pay basis we believe there will be no material uplift in earnings on the system from lower NGL prices. We anticipate little change in utilization to cater to European demand (via Marcus Hook export terminal) given the lack of vessels to transport product across the Atlantic. 30

31 Mariner East II: Mariner East II is the second phase of the Mariner project that is expected to be inservice in Q The project will expand the total takeaway capacity of Mariner East I by 275,000 barrels per day (both Propane and Ethane). Once in service SXL will be able to deliver NGLs to its Marcus Hook Industrial Complex on the Delaware River in Pennsylvania, where it will be processed, stored and distributed to various local, domestic and waterborne markets. Both projects are expected to be 100% take-or-pay contracts. Similarly we estimate EBITDA to be approximately $ mm for Mariner East II Lower NGL price Impact on Mariner II: At first glance a lower NGL price environment may be helpful in contracting new capacity on Mariner II (scheduled to be in-service Q4 2016) to facilitate local consumption and exports, however, given the temporary nature of the NGL price decrease in 2015 coupled with the short term shortage of export vessels, we believe that interested shippers views on contracting may not have changed much from before the NGL price revisions. Mariner West: Mariner West was built to deliver Marcellus shale ethane from MarkWest Liberty s Houston, Pennsylvania processing and fractionation complex to Sarnia, Ontario, Canada markets. Developed at the request of Marcellus producer customers and the pipeline is supported by Sarnia ethane consumers and was built using a combination of new and existing pipelines. We estimate EBITDA to be approximately $75mm for Mariner West Lower NGL price Impact on Mariner West: Given that almost 100% of capacity on Mariner West systems has been contracted on a take or pay basis there will be no material uplift in earnings from increased volumes on the system. We see more NGLs pulled into Sarnia due to low prices however we do not believe such movements to be material to earnings. EPD Pipelines: (Appalachia-to-Texas) ATEX Pipeline: EPD s ATEX began operations in January 2014 and operates in multiple states. Sized at 125,000 barrels per day (expandable to 265,000 barrels per day), ATEX primarily transports ethane in southbound service from NGL fractionation plants located in Ohio, Pennsylvania and West Virginia to EPD s Mont Belvieu storage complex. The ethane extracted by these fractionation facilities originates from the Marcellus and Utica Shale production areas. Lower NGL price Impact on ATEX: Although there is capacity on ATEX, increased utilization will largely be dependent on ATEX s willingness to discount its tariff rates to move product to the gulf coast. 31

32 Figure 47. ATEX Capacity Vs Contracted 44k BBl/d of free capacity 21k BBl/d of free capacity 9k BBl/d of free capacity E 2016E 2017E Design Capacity Contracted Volumes Source: Citi Research, Company Reports ATEX s current tariff rate of ~$0.25 per gallon to move ethane (from the North East to Mt. Belvieu) is higher than the price of Ethane forecasted by Citi s Commodities Team. Figure 48. ATEX Tariff vs. Citi Price Forecast $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.18 $0.18 $0.18 $0.17 $0.17 $0.17 $0.17 $0.19 $0.19 $0.19 $0.19 $0.00 Q4:17 Q3:17 Q2:17 Q1:17 Q4:16 Q3:16 Q2:16 Q1:16 Q4:15 Q3:15 Q2:15 Citi Commodities Forecast ($/Gallon) ATEX Tariff Rate ($/Gallon) Source: Citi Research, ATEX Tariff We believe that given its lower prices nationally and new US ethylene crackers not coming online until 1H 2017 (per Citi s Chemicals team), the movement of ethane from the Northeast to the Gulf Coast will be challenged. 32

33 Export Activities: We believe vessel availability is a critical component to the export story. Based on work done by Citi s Commodities Team, LPG fleet utilization had been tightening since 2009, rising from around 65% to 99% by the end of 2014 (see Commodities section above). As rising export volumes from the US and the Middle East impacted global prices while simultaneously increasing vessel utilization rates. Consequently we saw NGLS report a 15% sequential drop in LPG exports in the first quarter, while EPD maintained its export volumes. Figure 49. LPG Spot Rate for 43,000 mt Gulf-Japan ($/tonne) $160 $140 $120 $100 $80 $60 $40 $20 $ Nov 1993-Jan 1994-Mar 1995-May 1996-Jul 1997-Sep 1998-Nov 2000-Jan 2001-Mar 2002-May 2003-Jul 2004-Sep 2005-Nov 2007-Jan 2008-Mar 2009-May 2010-Jul 2011-Sep 2012-Nov 2014-Jan 2015-Mar Source: Citi Research, Clarkson Figure K CBM LPG 12 Month Time charter Rate ($ in 000/month) $2,500 $2,000 $1,500 $1,000 $500 $ Nov 2008-Apr 2008-Sep 2009-Feb 2009-Jul 2009-Dec 2010-May 2010-Oct 2011-Mar 2011-Aug 2012-Jan 2012-Jun 2012-Nov 2013-Apr 2013-Sep 2014-Feb 2014-Jul 2014-Dec 2015-May Source: Citi Research, Clarkson Domestic propane and butane inventories also reached peak levels prior to the winter season with Propane reaching an all-time high in June (~86MMBbls). Figure 51. Propane vs WTI Crude Prices $120 $100 $80 $60 80% 70% 60% 50% 40% Figure 52. Propane and Propylene Inventories (MMBbl) % $40 20% $20 10% $0 0% Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Crude Oil ($/Bbl) Propane ($/Bbl) Propane as a % of WTI J F M A M J J A S O N D Avg 2015 E Source: Citi Research, Bloomberg Source: Citi Research, EIA 33

34 Figure 53. Normal Butane-Butylene Inventories 70,000 60,000 Figure 54. Propane Vs N-Butane $1.40 $1.20 US N-Butane Inventory (M bbl) 50,000 40,000 30,000 20,000 10,000 $1.00 $0.80 $0.60 $0.40 $0.20 $ J F M A M J J A S O N D Range Avg E Propane ($/gal) N-Butane ($/gal) Source: Citi Research, EIA Source: Citi Research, Bloomberg The one positive news for Propane and Butane was increasing share in cracker feedstock due to lower prices. Yet this increase in share offset Ethane s share in cracker feedstock. Figure 55. Ethylene Feedstock Usage Figure 56. Ethylene Feedstock Usage April 15 Figure 57. Ethylene Feedstock Usage May 15 Naptha, 6.1% Gas Oil, 1.5% Naptha, 6.4% Gas Oil, 1.3% Naptha, 6.0% Gas Oil, 1.6% Butane, 7.2% Butane, 8.1% Butane, 8.6% Propane, 19.5% Ethane, 65.7% Propane, 21.2% Ethane, 63.0% Propane, 21.5% Ethane, 62.3% Source: Citi Research, Hodson Report Source: Citi Research, Hodson Report Source: Citi Research, Hodson Report Looking ahead, Citi s Commodities Team believes that accelerated ship delivery, rising exports and supply response could improve NGL prices in Interestingly, propane prices in Asia have stayed above $1/gal even in the current commodity price environment. This could open new markets for US LPG exports with propane in Asia trading at a premium of $0.60/gal vs Mont Belvieu. On the other hand, Northwest EU propane price premium vs Mont Belvieu prices has come down significantly over the last couple of years. Even so, propane prices in NW EU are still trading at a premium of over $0.30/gal over Mont Belvieu prices making exports attractive once additional ship capacity comes online and freight rates ease off a bit. 34

35 Figure 58. Propane Prices Mont Belvieu vs Northwest EU $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Figure 59. Propane Prices - Mont Belvieu vs Asia $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Northwest Europe Mont Belvieu Mont Belvieu Asia Propane Source: Citi Research, Bloomberg Source: Citi Research, Bloomberg In terms of tanker capacity, LPG tanker order book in 2016/2017 is 40% of the current fleet. More specifically, Citi s Commodities Team estimates that 900 MBbl/d equivalent of ships are already in order book and will be delivered by On the exports side, several companies in our coverage are expanding/adding new capacity over the next couple of years and are adding MMBbl/d of LPG export capacity. This includes facilities additions/expansions on the Gulf coast by EPD, OXY, PSXP. Figure 60. US LPG Export Capacity Existing Facilities & Sanctioned Bbls/Month Bbls/Day Projects Propane Butane Ship Loadings Low HIgh Low HIgh Timing EPD x MGC, VLGC 7,500,000 8,500, , ,333 Current NGLS x x MGC, VLGC 6,500,000 7,000, , ,333 Current Mariner East 1 (SXL) x MGC 750, ,000 25,000 25,000 Current DCP Midstream x 212, ,333 7,000 8,000 Current EPD x x VLGC 1,500,000 1,500,000 50,000 50,000 Current Mariner South (SXL) x x VLGC 6,000,000 6,000, , ,000 Current Altagas/Idemitsu (Acquired by Petrogas) x x 912, ,500 30,000 30,000 Current Total of Current 23,375,417 24,905, , ,667 Occidental x 1,825,000 3,041,667 60, ,000 Late 2015 EPD x x VLGC 6,000,000 6,500, , ,667 4Q:15 Phillips 66 x x 4,400,000 4,400, , ,667 4Q16 Mariner East Phase 1 (SXL) x MGC 1,368,750 1,368,750 45,000 45,000 Mid Mariner East Phase 2 (SXL) x 8,364,583 8,364, , ,000 4Q16 Total Current + Sanctioned 45,333,750 48,580,833 1,505,333 1,613,000 Proposed Projects Pembina Pipeline Corp x 1,000,000 1,200,000 33,333 40,000 Early 2018 Sage Midstream x x 1,429,583 1,429,583 47,000 47,000 4Q:16 Kinder Morgan x x 3,650,000 3,650, , ,000 Early 2017 Total Proposed 6,079,583 6,279, , ,000 Total Potential 51,413,333 54,860,417 1,705,667 1,820,000 Source: Citi Research, Company Reports In the northeast, Sunoco Logistics is expanding export capacity through Mariner East 1 expansion which started operations in 4Q14. By the end of third quarter, SXL will be able to export Ethane as well with a total Ethane+Propane capacity of 35

36 70MBbl/d. Mariner East 2 will add 275MBbl/d of export capacity in late Combined, SXL s mariner east and west projects will add 400MBbls/d of takeaway from the Utica/Marcellus. Furthermore, the Mariner East 2 pipeline can be scaled to a higher capacity as more demand is created, with a full upside capacity of 450 MBbl/d. Proposed pipes in this region include Kinder Morgan s Utica Marcellus Texas pipeline (430-kb/d, PA to LA) and Utopia East (50-kb/d, OH to MI/ON). Figure 61. Northeast NGL Takeaway Figure 62. NorthEast Proposed NGL Takeaway Projects Source: Citi Research, Markwest Presentations Source: Citi Research, Markwest Presentations In Western Canada, PAA has CO-Ed pipeline connecting some of the high growth regions in Western Alberta to the partnership s Fort Saskatchewan facility. PAA is spending $665 mil to expand fractionation capacity, add storage, as well as truck and rail capacity. PAA s Fort Saskatchewan is also linked to other third party mix gathering pipelines. On the East side, PAA s Ft Saskatchewan hub is connected to Sarnia hub through Enbridge s mainline that can carry oil and NGLs in batches. In Sarnia, PAA has fractionation, storage and connections to various pipelines. These pipelines connect Sarnia to PAA s St. Clair and Windsor Terminal. Here PAA is building rail offloading capacity. 36